Join the Conversation

1K bump in home price can shut buyers out of market

Mike Dillon, For The Tennessean
1:25 p.m. CDT August 15, 2014

Just a $1,000 increase in the median price for a newly built home can shut more than 200,000 households out of the U.S. housing market, according to a study by the National Association of Home Builders.
(Photo:
File / Getty Images
)

One of the often-overlooked impacts of building regulations is their effect on housing affordability. Every time a local or higher-level government issues a new construction regulation, it raises construction costs by, for example, increasing the price of construction permits or impact fees. Higher costs invariably translate into higher home prices and higher prices in turn disqualify more households from being able to afford new homes.

According to a new study by the National Association of Home Builders (NAHB), each $1,000 increase in the cost of a new median-priced home forces 206,000 prospective buyers out of the marketplace.

The number of households affected varies across states and metro areas and depends largely on their population, income distribution and new home prices.

Among the states, the number of households who would no longer qualify for a mortgage, based on a $1,000 increase to a median-priced home, ranges from a low of 313 in Wyoming to a high of 18,250 in Texas.

“This study highlights the real effects that building regulations have on housing affordability,” said NAHB Chairman Kevin Kelly, a homebuilder and developer from Wilmington, Del. “Local, state and federal government officials need to know that higher regulatory costs have real consequences for working American families. Oftentimes, these government regulations end up pushing the price of housing beyond the means of many teachers, police officers, firefighters and other middle-class workers.”

Based on national mortgage underwriting standards, and incorporating the latest income distribution data from the American Community Survey and the U.S. Department of Housing and Urban Development, the report contains detailed results for more than 300 metro areas.

The analysis found that every $833 increase in fees paid during the construction process — such as the price of a construction permit or an impact fee — adds an additional $1,000 to the final price of the home.

Among all metro areas, the number of households who would be priced out of the market based on a $1,000 increase range from a low of 19 in Napa, Calif. to a high of 5,742 in the New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa. area.

Looking at affordable metro areas, where roughly 50 percent or more of households can afford new homes, the “priced-out” effects are typically large and can often disqualify thousands of new home buyers, as in the case of Houston-Sugar Land-Baytown, Texas (4,234); Atlanta-Sandy Springs-Marietta, Ga. (4,135); and Las Vegas-Paradise, Nev. (2,044). The Nashville-Davidson-Murfreesboro-Franklin, Tenn., area registered a number of 1,096.

Among the states, Texas registers the highest “priced-out” effect, with more than 18,000 households that can be pushed out of the market for a median-priced new home if its price increases by $1,000. California, which is more populous but has fewer affordable new homes, registers the second highest “priced-out” effect — 14,423 households. The number in Tennessee reached 5,227.

Quite frequently — and often unintentionally — local regulations raise construction costs and trigger hikes in home prices. NAHB consistently relies on the “priced-out” model to estimate the impacts of price changes. Even though the model neither answers all questions nor estimates effects of regulation on new home sales or housing starts, it highlights often-overlooked effects of regulation on affordability of new homes. The new 2014 estimates show that, in relatively affordable metro areas, hundreds and sometimes thousands of households can be priced out of the new home markets as a result of prices rising by only $1,000.

Mike Dillon is the 2014 president of the Home Builders Association of Middle Tennessee and has more than 30 years of experience in the homebuilding industry. He is president of Westerly Construction Co. as well as the owner of Dillon Construction LLC.